Financial planning 101: Insurance and money tips for young professionals

Your first pay cheques feel like a lot of money, until you start spending them. Rent, clothes for work, money for transport, cash for the fun stuff – it doesn’t take long before you start wondering where it all went. Then along comes the financial services army, suggesting many more ways to use your earnings. Unit trust funds seem like a tantalising and sophisticated entry point to investing, and funeral polices may appear to be the right thing to do to protect your family if the worst happens to you. 

Don’t rush into any of these arrangements, particularly ones that will have you signing away chunks of your salary for what seems like eternity to you now. Investigate what you actually need, and then do homework on each piece of the financial puzzle before you commit to spending money. This way you may be able to avoid costly mistakes, or disappointment when an investment does not turn out the way you expected it to. 

The person talking to you about how to manage your personal finances can make the world of investing and personal finance sound so complicated that it is easy to believe they know best. Remember, it is their job to get you to commit to insurance and other products. Some will tug on your emotions, appeal to your vanity and generally do whatever it takes to get you to sign up to what they are selling.

Barry Hugo, head of the Hereford Group’s wealth management division in Durban, is part of this army. He encourages people who are at the beginning of their working lives to take a deep breath and focus on living within their means before taking any financial decisions. 

He reckons there’s very little sensible financial planning material out there for people who are just starting out in their careers. So, he put this article together to share some of his knowledge in an easy-to-digest format.

There are only two types of insurance that are absolutely essential, in his view: life cover and disability cover. The former will protect your dependents and cover your liabilities; the latter is aimed at providing an income if you have to stop working.

There are many different types of life and disability cover, so don’t just take the first ones put in front of your nose. Explore your options.

In this blog, Barry also emphasises the importance of saving as much as possible as soon as you can. There are many heartbreaking tales of people who have been paid good salaries throughout their careers but haven’t set aside enough to live comfortably beyond their final pay packet. – JC

Barry Hugo shares his best advice for people who are just starting out in their careers and want to take sensible financial steps.
Barry Hugo shares his best advice for people who are just starting out in their careers and want to take sensible financial steps.

By Barry Hugo*

I was recently asked by a client of mine if we had any pamphlet material outlining the basics of advice for people who have just started working.

I looked around and couldn’t find much that was satisfactory so I have decided to give a brief summary in financial planning 101. Please note that this is an initial guideline and is not meant to be an exhaustive all-encompassing view. If you do understand financial planning, please forward this to somebody who doesn’t.

Draw up a personal budget

The backbone of any financial plan and the foundation of financial wellbeing is a budget. If you spend more than you earn you will never be financially independent no matter how much you earn, I have seen people earning R300 000 per month net with expenses of R320 000 per month. A budget is the only instrument which can keep your expenses in check, most people underestimate their expenses.

Every person has three basic financial planning needs namely life cover, disability cover and savings.

Life Cover

There are two basic reasons why a person should have life cover, firstly to cover your debts and liabilities, and secondly to cover your future income stream for your dependents. If you have no dependents and no liabilities you don’t need life cover. Your life cover generally goes in a cycle increasing to a point where you have car debt, house debt and the maintenance of 2.5 kids and reducing as the debts reduce and the kids start becoming financially dependent.

Disability

Disability cover is often sold as a lump sum but income protection is probably the most neglected area of financial planning. No matter what your debt/dependent situation is, if you are earning an income you need to ensure that if you cannot work anymore that income will be covered.

Savings 

When looking at savings, there are a number of aspects that need to be taken into account. Short term needs (holidays, large expenses such as car tyres etc.) Medium term savings (saving for a deposit on a house, kids tuition fees etc.) and Long Term savings needs (Retirement). Whilst the numbers may vary it is an indisputable fact that most South African’s cannot retire at anywhere near the lifestyle they had before retirement. Compound interest is an incredibly powerful force and most people who can retire comfortably can do so because they started saving very early in their working lives. It is important that you start early enough and that you save enough. It is pointless putting away R150 per month starting at the age of 20 but not increasing that amount. I often get asked how much money is needed to retire. This is a very difficult as each person has different income needs, but if you want to retire at the age of 60 a general rule of thumb is that you will need investable capital of 25 times your annual net income needs.

Have a will

A will is a very important document that will only be used once. If you have any assets you need to have a will. Whilst most people hate thinking about their death a Will is an integral part of any decent financial plan.

The most important thing about being financially dependent is to have a plan, this plan will include a realistic budget, enough life cover (not too much) the right income protection and a properly managed portfolio of short, medium and long term investments. Most people do not have the time or inclination to set up this plan so it is important to have a reputable trustworthy financial advisor to help you achieve your goals.

* Barry started his career with Profplan Brokers, an independent boutique brokerage in Zululand, in 1994 and became the managing partner and a senior shareholder before leaving in 2007. He joined RMB Private Bank as a wealth manager and gained extensive experience in the structure and implementation of wealth management solutions for high net worth individuals and institutional clients. In 2011 Barry joined the Hereford Group to head up the Wealth Management Division in Durban. He is a wealth manager and a member of the investment committee at Seed Investments.

 

Visited 115 times, 1 visit(s) today